5 ways you can increase your take home pay as a contractor
As a contractor, you can increase your take home pay by claiming business-related expenses. When you set up a limited company, you can claim even more tax relief.
Setting up a limited company allows you to benefit from tax relief that is only available to businesses. When businesses claim this relief it reduces the amount of corporation tax they need to pay, which leaves more money left over to spend as they choose.
While this may seem straightforward, it’s worth considering employing a specialist contractor accountant to manage your accounts and ensure you don’t get hit with a large tax bill.
Here are five ways you can increase your take home pay as a contractor when you set up a limited company.
Pay yourself a lower salary
This may seem contradictory to the objective of increasing your take home pay, however, paying yourself a lower salary also means you are liable to pay less tax. For example, if you pay yourself a salary of £11,500 (the tax free allowance for 2017-18), you will not need to pay any tax on your salary while paying yourself a salary above this amount would see you incurring taxes of 20, 40 or 45 percent (depending on your income bracket).
Pay yourself dividends from your limited company
As a limited company director, you are responsible for managing your company finances and can choose how much to pay yourself. You can also choose how much to pay in dividends, which are taxed at a lower rate than most salaries. We recommend directors pay themselves through a mixture of salary and dividends as this allows you to reduce the amount of tax you need to pay across all income sources, which increases your take home pay.
Claim business-related expenses
Claiming business-related expenses reduces the amount of corporation tax your company has to pay and frees up more money to spend as you choose. When contractors think of claiming business-related expenses, the first expenses they usually think of are assets and equipment. While tax relief is available on these items, there are many more expenses you can claim through your limited company including utility bills and vehicle running costs.
Claim travel-related costs as expenses
If you commute to your place of work, chances are you have additional expenses you may not have realised you can claim as a contractor. Examples of these expenses include travel cards, parking charges and subsistence. While these are not large expenses, they all add up and help you reduce your tax bill so you can increase your take home pay.
Claim accounting and professional fees as expenses
Many contractors are unaware they can claim accounting and professional fees as business-related expenses while costs for advertising and marketing your company are also eligible for tax relief. As these costs can be significant, claiming these expenses through your limited company helps increase your take home pay by reducing the amount of tax your company has to pay and frees up more money to spend as you choose.
Since 2008, Cobia Accounting has helped hundreds of contractors set up their own limited companies and save them time, money and hassle. To learn more about how we can help increase your take home pay, contact us today.